Thursday, December 15, 2016

Business and other standard mileage rates decrease for 2017


The IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will decrease by 0.5¢ to 53.5¢ per mile for business travel after 2016. This rate can also be used by employers to provide tax-free reimbursements to employees who supply their own autos for business use, under an accountable plan, and to value personal use of certain low-cost employer-provided vehicles. And, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction will decrease by 2¢ to 17¢ per mile.

The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving.



Employers that require employees to supply their own autos may reimburse them at a rate that doesn't exceed the business mileage allowance for employment-connected business mileage, whether the autos are owned or leased.) The reimbursement is treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip. Additionally, an employee's personal use of lower-priced company autos may be valued at the optional mileage allowance if the conditions specified in Reg. § 1.61-21(e)(1) are met.



A separate rate applies for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction.) The mileage rate for driving an auto for charitable use (14¢ per mile) is a statutory rate that's not adjusted for inflation.

IRS generally adjusts the standard mileage rate annually, based on a yearly study of the fixed and variable costs of operating an auto. However, IRS has made mid-year adjustments in certain years when necessary to better reflect the real cost of operating an auto in light of rapidly rising gas prices.



Depreciation. For 2017, provides that the depreciation component of the mileage rate for autos used by the taxpayer for business purposes is 25¢ per mile. (It was 24¢ per mile for 2016 and 2015; 22¢ per mile for 2014; and 23¢ per mile for 2013.) The depreciation
component reduces the basis of the auto for gain or loss purposes.



 A taxpayer may use the mileage allowance method for a leased auto only if he uses that method (or a fixed and variable rate (FAVR) allowance method) for the entire lease period.) Employers may use a FAVR allowance method to reimburse employees who supply their own cars for business (whether the cars are leased or owned). For 2017, the standard auto cost used to compute the FAVR allowance cannot exceed $27,900 (down from $28,000 for 2016). For trucks or vans, the 2017 standard auto cost used to compute the FAVR allowance cannot exceed $31,300 (up from $31,000 for 2016).

Friday, October 28, 2016

Social Security Earning Cap to Increase 7.3%

Workers will pay more in payroll taxes next year to support Social Security, while retirees and other program beneficiaries will see a modest increase in their monthly benefits. Based on low inflation over the past two years, benefits will see a 0.3 % COL increase.


The Social Security Agency also said the maximum amount of earnings subject to the Social Security tax would climb 7.3% to $127,200 in 2017 from $118,500 in 2015 and 2016, affecting an estimated 12 million workers. The worker’s share of Social Security payroll tax is 6.2% of eligible wages; someone making at least $127,200 in 2017 would pay an additional $539 over the course of next year.


Employers also pay a 6.2% tax on eligible wages and would pay more, too, though economists generally believe those costs are borne by workers in the form of lower wages. Self-employed people pay the employer’s and employee’s share of the tax.


The cost-of-living figure also plays a major part in determining premiums for Medicare Part B, which covers doctor visits and other types of outpatient care for elderly and disabled Americans.


The 0.3% bump is likely to result in higher premiums for some 30% of Medicare beneficiaries. They include those who already pay higher premiums because of their higher incomes, those who receive Medicare but have deferred or aren’t eligible for Social Security benefits and those who are new to Medicare in 2017.

Wednesday, October 26, 2016

Will New Jersey's Estate Tax Repeal "Stick"?

As we all know the legislation adding the gas tax, reducing and repealing New Jersey's estate tax, and increasing the exemption for the tax on retirement income is now law.


We also know that New Jersey's pensions are underfunded and as admitted by the proponents of the legislation, revenue will not match expenditures and therefore the state will have to borrow to bridge the financial gap.


Assume that the next governor is a democrat faced with a deficit and shrinking revenues, what would he or she do? Well in 2017 the estate tax exemption with increase from $675,000 to $2,000,000.  The repeal is scheduled for January 1, 2018. By then we will have a new governor. It's not too much of a stretch to realize that the revenue loss can be partially made up by "freezing" the estate tax repeal.  At $2,000,000 the exemption will reduce the number of taxable estates but not eliminate them. Moreover the number of voters affected would drop dramatically. Keeping the exemption at $2,000,000 might be acceptable to all.


Just a thought!

Wednesday, October 5, 2016

Changes that will be required to Patnership and LLC Operating Agreements due to the Repeal of TEFRA


The Bipartisan Budget Act changed the procedures for auditing tax returns filed by partnerships. The TEFRA partnership audit procedures which were adopted in 1982 and the electing large partnership rules are repealed effective for returns filed for partnership tax years beginning after 2017. These rules will be replaced with a new set of rules for auditing partnerships and their partners at the partnership level.

Under the new approach, adjustments to a partnership's items of income, gain, loss, deductions, and credits will be made at the partnership level. This means that the partnership for the first time in 75 years will be subject to a partnership level income tax.  The tax rate will be the highest individual or corporate rate. Any additional tax, penalty, or additional amount related to the tax will also be determined at the partnership level [IRC Sec. 6221(a), effective after 2017]. If an adjustment to the partnership items is made, the partnership will be required to pay tax equal to the imputed underpayment, which is generally the net of all adjustments for the year under audit multiplied by the highest individual or corporate tax rate. However, partnerships that can show that the underpayment would be lower if it were based on certain partner-level information can pay the lower amount. The information needed to show that a lower underpayment amount should apply could include amended returns of partners, the tax rates applicable to specific types of partners (e.g., individuals, corporations, or tax-exempt organizations), and the type of income subject to the adjustments ( IRC Sec. 6225, effective after 2017).

Instead of taking the adjustment into account at the partnership level, a partnership can elect, not later than 45 days after receiving a notice of final partnership adjustment, to issue adjusted Schedules K-1 to the partners who were in the partnership in the year under audit. Those partners would then take the adjustments into account in the adjustment year by filing amended returns through a simplified amended return process ( IRC Sec. 6226 , effective after 2017). This is called a “push out elections” which countermand the default rule above and makes the partners individually subject to the tax liability.  Under this rule the interest rate on any deficiency paid by a partner is 2% higher than it would otherwise be.

Under the revised audit rules, partners generally must treat each item of income, gain, loss deduction, or credit attributable to a partnership consistently with the partnership's treatment of the item. Any underpayment of tax by a partner due to failure to comply with this consistency requirement will be treated as a mathematical or clerical error (subject to the summary assessment procedures of IRC Sec. 6213(b)(1), and that the abatement requirement under IRC Sec. 6213(b)(2) will not apply. The consistency rule will not apply if (a) the partnership has filed a return but the partner's treatment of the item is (or may be) inconsistent with the treatment on the partnership's return or (b) the partnership has not filed a return, provided the partner files a statement with the IRS identifying the inconsistency [ IRC Sec. 6222 , effective after 2017].

Partnerships with 100 or fewer partners can “opt out” of the new rules for any tax year, in which case the partnership and its partners will be audited under the general rules for individual taxpayers. Generally, to elect out, each of the partners has to be an individual, a C or S corporation, a foreign entity that would be treated as a C corporation were it domestic, the estate of a deceased member, or another person identified in future IRS guidance [IRC Sec. 6221(b), effective after 2017].  Notwithstanding if a partnership has a partnership or trust as a partner, they cannot elect out and they are subject to the new audit default rules.

Instead of waiting for the new rules to come into effect, partnerships generally can elect to apply them to returns filed after November 3, 2015.

The position of “Tax Matter Partner” has been replaced with “Partnership Representative.  The “PR” need not be a partner.  This person will have exclusive power to deal with the IRS.  This means that the Partnership Representative will decide on resolving the tax issue and can allocate the additional tax in a manner that he, she or it deems reasonable.

 

Under the new rules, partners who are in the partnership in the year an adjustment is finalized bear the economic burden of any imputed underpayment paid at the partnership level, regardless of whether they were partners in the year the adjustment arose. This means that if a partnership’s tax year of 2018 is audited in 2020 and an adjustment is made in 2022, the partners who exist in 2022 will bear the economic burden of the adjustment for 2018 even though they might not have been partners in the audit year.

Adding an indemnification agreement to partnership agreements, under which partners who sell or liquidate their interest before an audit agree to be responsible for any adjustment attributable to years they were a partner, could address this problem.

Impact on Business Deal

The repeal of the TEFRA audit rules will have significant impact on every Partnership and LLC Operating Agreement and business deal. 

Significant Impact on Preparation of Partnership Agreements

            °           Designation of partnership representative.

            °           Partner approval of certain decisions made by partnership representative.

            °           Contractual notice/participation rights.

°           Indemnification by current and former partners of partnership tax liability under default rule (including method of allocating liability among partners).

 

Significant Impact on Partnership Transactions

°           Acquisitions of partnership interests.

°           Partnership M&A transactions.

°           Due diligence/representations/indemnification

Should partners seek to include in the agreements rights similar to those

°           notice rights of beginning of administrative proceeding and final partnership administrative adjustment (former 6223(a));

°           PR is required to keep each partner informed of all administrative and judicial proceedings of partnership items (former 6223(g));

°           right to participate in the proceeding (former 6624);

°           petition for judicial review (former 6626);

°           petition for an administrative adjustment (former 6627).

 

Planning Ahead for 2018

°           All existing and newly-formed partnerships should be considering provisions to be included in amended or new partnership agreements.

           

Because the audit rules have changed, the economic exposure of partners and members in LLCs have changed as well.  Partners and LLC members will have to rethink their agreements, and come up with indemnifications, deal with indemnification by former partners, consider escrows in the event of purchase of partnership interests, and so on and so forth.

           

 

 

 

 

Tuesday, October 4, 2016

New Jersey Proposes to eliminate their estate tax...but don't be so happy


New Jersey Governor Chris Christie, along with Senate President Stephen Sweeney and Assembly Speaker Vincent Prieto, announced that an agreement has been reached to implement broad-based tax cuts, in addition to an increase in the state's gas tax.



Gross income tax. The bipartisan agreement provides for an increase of the earned income tax credit to 35% of the federal benefit amount beginning in the 2016 tax year, in addition to a personal income tax exemption to all New Jersey veterans honorably discharged from active military service or the National Guard. The agreement also provides for an increase in the gross income tax exclusion for pension and retirement benefit income over four years to $100,000 for joint filers, $75,000 for individuals, and $50,000 for those persons filing a married/filing separate return.


Comment: This is good for New Jersey as retirees will be able to save on taxes to their retirement.  They can use their savings to pay high New Jersey property taxes!



Sales tax. As of January 1, 2017, the state's sales tax is reduced from 7% to 6.875%, and as of January 1, 2018, the tax will be further reduced from 6.875% to 6.625% for a total sales tax reduction of 0.375%.



Estate tax. The agreement phases out the estate tax over the next 15 months beginning on January 1, 2017, with a $2 million exclusion. The tax will be eliminated as of January 1, 2018.
Comment:  Finally the Governor and the legislature has seen the light.  Now they have to work on other high and unreasonable taxes.


Notwithstanding taxpayers will still have to contend with the income tax on trust income over $10,000.


Gasoline tax. The gasoline tax will be increased by 23¢ per gallon of gas sold or used in the state. Currently, gasoline is subject to a tax of 10-1/2¢ per gallon.


Now the question as to whether you should move to another "tax free" state like Florida becomes much closer. 

Thursday, September 22, 2016

ADDITIONAL MEASURES IMPLIMENTED TO ENFORCE FEDERAL TAX LIABILITY


A taxpayer with a seriously delinquent tax debt may have his passport revoked.
If an individual is certified as having a seriously delinquent federal tax debt IRC section 7345 the IRS allows the IRS to notify the State Department of the delinquency and the State Department which will determine whether to deny, revoke, or limit that individual's passport.
A seriously delinquent tax debt means an unpaid legally enforceable federal tax liability of an individual that:
  1. has been assessed,
  2. exceeds $50,000, and
  3. as to which (a) a notice of lien has been filed under IRC section 6323 and the administrative rights under IRC section 6320 for that lien have been exhausted or have lapsed, or (b) a levy is made under IRC section 6331.
The threshold for notice in 2016 is $50,000. In calculating the $50,000 threshold, interest and penalties are included. For calendar years after 2016, the $50,000 amount will be adjusted annually for inflation by the cost-of-living adjustment.

A seriously delinquent debt does not include a debt that (1) is being paid in a timely manner under an installment or compromise agreement, and (2) for which a collection action is suspended because a collection due process hearing is requested or is pending or innocent spouse relief has been requested.

The IRS must notify the State Department if its certification is found to be erroneous, or the relevant debt is fully satisfied or ceases to be a seriously delinquent tax debt under the above exceptions. This decertification is limited to the taxpayer who is the subject of one of the above actions. Decertification can occur from a claim for innocent spouse relief. The notification must be made not later than the date required for issuing the certificate of release of lien for the debt. Notification must be made:
  1. not later than 30 days after an innocent spouse relief election or request for equitable relief;
  2. not later than 30 days after an installment agreement is entered into or an offer in compromise is accepted by IRS;
  3. as soon as practicable after finding that a certification is erroneous.
The IRS must notify the taxpayer if it sends a certification to the State Department or if that certification is reversed. That notice must inform the individual of his right to bring a civil action in a U.S. district court or the Tax Court. A court that determines that the certification is erroneous may order the Treasury to notify the Secretary of State of the error.

The IRS is not the only public agency to use special measures to enforce collection of tax debt. In 2013 New York passed legislation to allow a driver license to be suspended when a taxpayers past-due tax liability exceeds $10,000. Under the law those taxpayers have 60 days to respond before receiving a second notice, allowing 15 more days to respond. If taxpayer again fails to arrange payment, his or her license is suspended until the debt is paid.

Tuesday, May 24, 2016

Retailer's Loyalty Discounts Are Deductible before Being Redeemed


In Giant Eagle, 117 AFTR 2d 2016-XXXX (CA 3) the 3rd Circuit recently held that a large supermarket chain could deduct the costs of loyalty discounts even if its customers hadn't yet claimed the rewards. The taxpayer offered a loyalty “fuelperks program” that awarded gas discounts, which if unused, expired in three months. In 2006 and 2007 Giant Eagle deducted the estimated costs of redeeming a certain portion of the issued but unexpired and unredeemed fuelperks.

The IRS denied the deduction claiming that the obligation to make payment was not fixed. The Tax Court upheld, finding that the discounts became fixed when the discounts were redeemed, not when they were earned.

Under the accrual method of accounting, expenses are deductible in the first year in which

(1) All events have occurred that establish the fact of liability;

(2) The amount of the liability can be determined with reasonable accuracy; and

(3) Economic performance has occurred.

This is sometimes referred to as the "all-events test." The first two parts of the test are found in Reg. §1.461-1(a)(2). The third part is the result of the addition of Section 461(h) to the Code in 1984.

The 3rd Circuit disagreed with the IRS and the Tax Court, reasoning that Reg. 1.451-4(a)(1) allows accrual method taxpayers to deduct expenses before they were paid as long as the all events test has occurred to determine the existence of the liability and the amount of the liability could be “reasonably determined.”

Relying on in United States v. Hughes Properties, Inc., 476 U.S. 593 (1986) and Lukens Steel Co. v. Commissioner, 158 F.3d 484  (9th Cir. 1998), the 3rd. Circuit reversed the IRS and Tax Court in determining the taxpayer's anticipated liability was fixed at year's end with reference to contract law principles. Specifically, Giant Eagle characterizes its issuance of fuelperks! rewards as a unilateral contract formed at checkout, which conferred “instant liability” on the supermarket chain to its customers for the rewards they accrued.

The dissent, citing Gold Coast Hotel & Casino v. United States, 158 F.3d 484, (9th Cir. 1998) said for purposes of the 'all events' test, what is critical is the existence of an absolute liability. Since the dissent found that after 3 months there was no liability to the card holder and furthermore there was no certainty that the point would in fact be redeemed the dissent would have denied the deduction.

If one were to focus on Treas. Reg. § 1.461-1(a)(2)(i) it provides:

Under an accrual method of accounting, a liability ... is incurred, and generally is taken into account for Federal income tax purposes, in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability. (emphasis added).

It appears that the Giant Eagle decision is at odds with case law and published regulations. What effect this 3rd Circuit opinion will have remains to be seen.